The Occurence of Tax Amnesties: Theory and Evidence

Ralph-C. Bayer, Harald Oberhofer and Hans Winner

Journal of Public Economics (2015)

Presented byOnursal Bagırgan

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Introduction

Tax amnesty is a limited-time opportunity for a specified group oftaxpayers to pay a defined amount, in exchange for forgiveness of atax liability (including interest and penalties) relating to a previoustax period or periods and without fear of criminal prosecution.

A fiscal tool to deal with mounting public deficits

Frequently used, especially after the recent crisis

Not all amnesties raised considarable revenues

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Literature on Tax AmnestiesFiscal impacts of tax amnesties

Evidence from US: Mikesell (1986), Fisher at al. (1989), Alm andBeck (1991,1993), Luitel and Sobel (2007), Mikesell and Ross (2012)

Outside of US: Uchitelle (1989), Cassone and Marchese (1995), Almet al. (2000), Lopez-Labardia and Rodrigo (2003), Baer and LaBorgne (2008)

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Literature on Tax AmnestiesTaxpayer participation

Andreoni (1991): Consumption shock before amnesty

Malik and Schwab (1991): Learning risk preferences once an amnestyis offered

Andreoni (1992): Consumption smoothing

From criminology point of view

Gottfredson and Hirschi (1990), Nagin and Pogarsky (2004):Neglecting future bad consequences

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The paper

A theoretical model:

A new taxpayer motive: Signal of imminent detection

Example: Purchase of Swiss banking data by German authorities

Effect of taxpayers’ initial expectations and strategic deliquency

Ross and Buckwalter (2013): 4.3-16.5% of US State tax amnestyrevenues

Testing of the model:

A panel of US state amnesties 1981-2011

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Main Finding

The self-fulfilling character of tax amnesties:

Higher expectation of a tax amnesty=⇒ Higher tax evasion=⇒ Lower tax revenues=⇒ Higher necessity of tax amnesty

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The ModelTiming

1 Nature determines income y , the distribution of gross income is q(y).

2 The taxpayer learns y , declares income d∈ [0, y ] and pays tax td

3 Nature decides if some shock occurs that makes future detection acertainty, where s ∈ {0, 1}. Prob(s = 1) = σ.

4 The government decides if there is an amnesty. The probability is φ.

5 If there is an amnesty, then the taxpayer may declare additionalincome as as∈ [0, y − d ] and pays additional taxes tas .

6 Nature determines whether the true income is verifiable (withprobability p). The taxpayer pays fines F (y , d , as) if that happens.

Taxpayer’s expected utility:

EU(d , as) = U1(y , d) + δEU2(y , d , as , φ, σ)

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Taxpayer’s ProblemDecision to participate tax amnesty

Detection shock received:

EU2(as |α = 1, s = 1, y , d) =− F (y − d − a1)− ta1

=⇒ a∗1 = y − d

Detection shock not received:

EU2(as |α = 1, s = 0, y , d) =p[−F (y − d − a0)− ta0] + (1− p)[−ta0]=⇒ pF ′(y − d − a∗0) = t

Notice thatda∗1dd

=da∗0dd

= −1

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Taxpayer’s ProblemDecision to declare income

EU(d , a∗1, a∗0) =y − td

+ δ[σEU2(d , s = 1, a∗1(d)) + (1− σ)EU2(d , s = 0, a∗0(d))]

where

EU2(d , s = 1, a∗1) =− φ(y − d)t − (1− φ)(F (y − d))

EU2(d , s = 0, a∗0) =− φ(pF (y − d − a∗0) + a∗0t)− (1− φ)pF (y − d)

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Taxpayer’s ProblemDecision to declare income

The optimal decision is given by

F ′(y − d∗) =t(1− φδ)

δ(1− φ)(p(1− σ) + σ)

Lemma (1)

For δ < 1 at any interior solution,dd∗

dφ< 0 holds. Also notice that,

dd∗

dt< 0,

dd∗

dp> 0,

dd∗

dσ> 0,

dd∗

dy> 0

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Government’s ProblemGovernment’s benefit function

Government’s valuation is B(G , ρ)

G is government spending

ρ is the state of the economy

Assumptions on valuation

∂2B(G , ρ)

∂G 2≤ 0

∂2B(G , ρ)

∂G∂ρ> 0

Then, the benefit of an amnesty is

∆B = B(t(D + A), ρ)− B(tD, ρ)

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Government’s ProblemProperties of benefit function

∆B = B(t(D + A), ρ)− B(tD, ρ)

Lemma (2)

The benefit function has the following properties.

∂∆B

∂D= −t ∂B(tD, ρ)

∂G∂B(tD, ρ)

∂G≤ 0 =⇒ ∆B ≤ 0

∂∆B

∂ρ≥ 0

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Government’s ProblemAmnesty decision

The cost of amnesty is θ

θ is drawn from a distribution with cdf H(θ)

Government declares amnesty ⇐⇒ θ ≤ ∆B

The probability of an amnesty µ(∆B(D)) = H(∆B(D)).

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Perfect Bayesian Nash Equilibrium

Sequential Rationality: Already done

Consistency of beliefs:

Z (φ) = µ(∆B) ◦ ∆B(D) ◦D∗(φ)

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Perfect Bayesian Nash Equilibrium

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Testable Hypotheses from the Model

Tax amnesties have a self-fulfilling characteristic.

Higher ∆B, higher the occurrence probability of amnesty.

Effect of t is ambiguous.

Higher ρ, higher the occurrence probability of amnesty.

Lower θ, higher the occurrence probability of amnesty.

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Empirical Analysis

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Empirical Analysis

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Empirical Analysis

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Conclusion

Theoretical model:

Tax amnesties have self-fulfilling characteristic: Committing not toenact amnesties might be beneficial.

Model allows multiplicity of equilibria, i.e. different tax evasions arepossible for similar economies.

Testable hypotheses of theoretical model generally matches well withthe evidence from data.

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